For many years, we have been extremely focused on shadow banking and most specifically the repo markets (recently here and here). Most market participants will go through their trading life ignorant of the fact that the leverage in this market is what drives their assets up or down in most cases (because understanding something new is so 'old normal' even if it remains a major potential catalyst for problems ahead). The regulators get it though (kinda). As Barclays notes, changes to the risk-weightings of low-risk assets in the repo markets means US banks will need to deleverage by raising $30bn of fresh capital or reducing their (mostly low-risk) assets by $598bn - not chump change in a market dominated by the Fed (and one that some have already raised default and liquidity concerns about).
The USA is veering into a psychological space not unlike the wilderness-of-mind that Germany found itself in back in the early 20th century: the deep woods of paranoia where our own failures will be projected onto the motives of others who mean to do us harm. The USA cannot come to terms with the salient facts staring us in the face: that we can’t run things as we’ve set them up to run. We refuse to take the obvious actions to set things up differently. That disorder has infected our currency and the infection is spreading to all currencies. The roar you hear in the distance this September will be the sound of banks crashing, followed by the silence of business-as-usual grinding to a halt. After that, the crackle of gunfire.
The rapid pace of China credit expansion since the Global Financial Crisis, increasingly sourced from the inherently more risky and less transparent "shadow banking" sector, has become a critical concern for the global markets. From the end of 2008 until the end of 2013, Chinese banking sector assets will have increased about $14 trillion. As Fitch notes, that's the size of the entire US commercial banking sector. So in a span of five years China will have replicated the whole US banking system. What we're seeing in China is one of the largest monetary stimuli on record. People are focused on QE in the US, but given the scale of credit growth in China Fitch believes that any cutback could be just as significant as US tapering, if not more. Goldman adds that China stands to lose up to a stunning RMB 18.6trn/$US 3trn. should this bubble pop. That seems like a big enough number to warrant digging deeper...
"Many people still refuse to work in Germany; it's the language and demons of the past," but for many, crossing the Rhine is now the only option to escape the dismal depression-like economic environment that is engulfing France (as we most recently discussed here and here). As one border-crossing employee noted, "in Germany, they take people more easily and train them for new work even if you have worked in a totally different area than the one asked for," and with unemployment in Alsace (France) at about 10% and the jobless rate in the bordering German state of Baden-Wuerttemberg at a mere 4%, it is little wonder that an increasing number - around 24,000 French people (from this 'symbolic' region) are crossing over for work.
As Detroit begins to sort through the ill-begotten public liabilities that have driven it to bankruptcy, an important opportunity is at hand to revitalize the city that was once the epicenter of American entrepreneurship and manufacturing, while setting an example for other municipal governments that appear to be headed toward a similar fate. Here is an “Austrian moment” in the making, a potential libertarian awakening guided by the market-oriented, non-interventionist principles of the Austrian school of economics. For years, Detroit’s expenditures vastly exceeded its revenues. But, as long as investors were willing to purchase risky bonds, neither politicians nor unions would admit how unsustainable Detroit’s situation was. Detroit’s bankruptcy is thus exactly what the financial system needs.
Recent data releases have contained mixed messages. Bulls cling to anecdotal data points to support their 'recovery around the corner' green-shoots justification for equity valuations while bears remain mired in the reality of a slow and dismal recovery-less recovery. The following 13 charts (with 1 bright shining point of government sponsored exuberance) paint a different picture than the all-time high stock prices suggest.
A bearish take on U.S. stocks is about as fashionable as a beehive hairdo at the moment, which makes it a decent time to think like a contrarian. Sell-side strategists with a sense of reality are few and far-between but as ConvergEx's Nick Colas warns, the most important reason for caution currently is, obviously, valuation and complacency. U.S. stocks currently reflect, both in price level (16x current year earnings) and implied volatility (an 11 handle VIX), an economic acceleration which has yet to fully flower. In addition, Colas adds, domestic equities look good in part simply because everything else – Europe, Japan, emerging markets, etc... - look so bad. Wouldn't an accelerating U.S. economy spill over to other regions? So what is lurking around the corner for the next lucky Fed head? And what about the three main memes for why the 'bull' can keep running?
Nearly a year after the Benghazi embassy attack that left four Americans dead including ambassador Chris Stevens, it seems that the deaths of US citizens have "made a difference" after all in the eyes of the amusingly named US Department of Justice, which moments ago filed criminal charges related to the Libyan attack. Alas, that's all we know because as the WSJ reports, the charges were filed under seal. It probably means that is all that shall be known until one day, several years from now long after Eric Holder has left the building, the DOJ will unseal the charges and disclose it never had a case to begin with.
Information overload and cognitive dissonance often hide the facts from right under one's nose. Sometimes, as in the case of the following image, a picture paints a thousand words; and in this case, any doubt about where the world's 'most-bust-prone' nations are in the post-crisis new normal should be instantly (and visually) dismissed (as we noted here, here, and here).
We're going to need a bigger camera...
Another day, another Hindenburg Omen sighting as Fed speeches did little to provide moar exuberance as better-than-expected data keeps hinting at an early Taper and removal of the punchbowl. Stocks have seen two days in a row of 'redness' with a mind-numbing loss of around 0.7% for the S&P 500 (and more for the Trannies) that sparked a litany of 'off-the-lows' and 'moral victory for the bulls' comments as volume remained lack-luster at best (all compressed into the sell-off phase into the European close). The Taper picture remains a little unclear across asset-classes though; as gold, silver, and oil dropped (Taper on), Bonds unch (Taper hhmm), stocks down led by builders (Taper on), USD weakness (Taper not on) but JPY strength was the driver (carry unwind on Taper on). VIX pressed up towards 13% (its biggest rise in 7 weeks) and credit is underperforming.
Ready to unveil his cunning plan for getting the GSE monkey off his back, President Obama is in Phoenix, Arizona today to discuss "restoring security to homeownership." Ironic really that he is giving this speech in the epicenter of the new bubble in housing (Phoenix home prices +23% YoY) as he offers up a "better bargain for the middle class" which seems to mean a 'promise' that home prices will never fall again. Moar intervention, moar unintended consequences of capital mis-allocation, and moar un-affordability for the average middle-class person in Arizona now the bubble is reblown. Grab the popcorn, this will be good - as Obama explains the upside for private investors to take on that first loss piece of the mortgage market (in a rising rate environment with home prices bubbling).
From "buy low, sell high; 'fear', that's the other guy's problem" to "don't worry if the price goes up, just keep buying," Trading Places is, as Dan Aykroyd describes "the greatest business movie of all time." It's hard to disagree but in the brief 2 minute Bloomberg collage of clips and interview, Aykroyd explains the movie's epic 'orange juice pit' finale (which in some strange way reminds us of the unapologetically crowded one-sided nature of the current US equity market)...
Warren Buffett's recent investments in something as mundane as rail appear to have found big fans in an unexpected place: the Kremlin.
Confidence leads to spending; spending strengthens the economy; and economic strength buttresses confidence. It’s a circular, self-fulfilling prophesy. Confidence can also fuel market movements. Belief that the price of an asset will rise causes people to buy the asset... making its price rise. This is another way in which confidence is self-fulfilling. But, of course, as Oak Tree Capital's Howard Marks points out, the confidence that underlies economic gains and price increases only has an impact as long as it exists. Once it dies, its effect turns out to be far from permanent. As the economist Herb Stein said, "If something cannot go on forever, it will stop." This is certainly true for confidence and its influence. As far as confidence today, Marks notes significant uncertainty is one of the outstanding characteristics of today’s investing environment. It discourages optimism regarding the future and limits investors’ certainty that the future is knowable and controllable. In other words, it saps confidence. This is a major difference from conditions in the pre-crisis years. In fact, Marks warns he doesn't remember when his list of 'uncertainties' was this long...